Western Digital 2010 Annual Report Download - page 28

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Current or future competitors may gain a technology advantage or develop an advantageous cost structure that we cannot
match.
It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing
technology, or process technology, which may allow them to offer products or services that have a significant advantage
over the products and services that we offer. Advantages could be in capacity, performance, reliability, serviceability, or
other attributes. We may be at a competitive disadvantage to any companies that are able to gain these advantages.
Further industry consolidation could provide competitive advantages to our competitors.
The hard drive industry has experienced consolidation over the past several years. Consolidation by our competitors
may enhance their capacity, abilities and resources and lower their cost structure, causing us to be at a competitive
disadvantage. Additionally, continued industry consolidation may lead to uncertainty in areas such as component
availability, which could negatively impact our cost structure.
Sales in the distribution channel are important to our business, and if we fail to maintain brand preference with our distribu-
tors or if distribution markets for hard drives weaken, our operating results could suffer.
Our distribution customers typically sell to small computer manufacturers, dealers, systems integrators and other
resellers. We face significant competition in this channel as a result of limited product qualification programs and a
significant focus on price and availability of product. If we fail to remain competitive in terms of our technology, quality,
service and support, our distribution customers may favor our competitors, and our operating results could suffer.
Additionally, if the distribution market weakens as a result of a slowing PC growth rate, technology transitions or a
significant change in consumer buying preference, or if we experience significant price declines due to oversupply in the
distribution channel, then our operating results would be adversely affected.
The hard drive industry is highly competitive and can be characterized by significant shifts in market share among the major
competitors.
The price of hard drives has fallen over time due to increases in supply, cost reductions, technological advances and
price reductions by competitors seeking to liquidate excess inventories or attempting to gain market share. In addition,
rapid technological changes often reduce the volume and profitability of sales of existing products and increase the risk of
inventory obsolescence. These factors, taken together, may result in significant shifts in market share among the
industry’s major participants. In addition, product recalls can lead to a loss of market share, which could adversely affect
our operating results.
Some of our competitors with diversified business units outside the hard drive industry may over extended periods of time sell
hard drives at prices that we cannot profitably match.
Some of our competitors earn a significant portion of their revenue from business units outside the hard drive
industry. Because they do not depend solely on sales of hard drives to achieve profitability, they may sell hard drives at
lower prices and operate their hard drive business unit at a loss over an extended period of time while still remaining
profitable overall. In addition, if these competitors can increase sales of non-hard drive products to the same customers,
they may benefit from selling their hard drives at lower prices. Our operating results may be adversely affected if we
cannot successfully compete with the pricing by these companies.
If we fail to qualify our products with our customers or if product life cycles lengthen, it may have a significant adverse
impact on our sales and margins.
We regularly engage in new product qualification with our customers. Once a product is accepted for qualification
testing, failures or delays in the qualification process can result in delayed or reduced product sales, reduced product
margins caused by having to continue to offer a more costly current generation product, or lost sales to that customer
until the next generation of products is introduced. The effect of missing a product qualification opportunity is
magnified by the limited number of high volume OEMs, which continue to consolidate their share of the storage
markets. Likewise, if product life cycles lengthen, we may have a significantly longer period to wait before we have an
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